A recent report from the nonpartisan Tax Foundation unveiled substantial differences in unemployment insurance (UI) tax rates and structures across the United States. The 2025 State Tax Competitiveness Index offers a detailed examination of each state’s tax system, with a focus on UI taxes.
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| UI tax impact |
| UI tax rates vary |
| Caution with UI tax strategies |
| Utilize voluntary contributions where applicable |
| Other risks and higher industry rates |
| Compliance and worker classification |
| Importance of appeals |
| Keeping records |
| Report recommendations |
UI tax impact
The report emphasizes that UI taxes, though often overlooked, can significantly affect a state’s business tax climate. States with the most competitive UI tax systems, such as Delaware, Arizona, Nebraska, Kansas, and Missouri, typically have lower tax rates, wage bases closer to the federal level, and simpler experience formulas.
Conversely, states like Hawaii, Rhode Island, Massachusetts, Nevada, and New Jersey rank poorly, with New Jersey being the worst. These states generally have higher tax rates, wage bases well above the federal level, and more complex systems with additional surtaxes.
Understanding the complexities of UI taxes is crucial for businesses aiming to manage their tax liabilities effectively. Employers should stay informed about state-specific UI tax programs and policies to optimize their tax strategies and ensure compliance with federal and state regulations.
UI tax rates vary
Eric Fader, Special Counsel at Duane Morris LLP, explained that an employer’s UI tax rate can vary widely based on the state’s UI tax program and the employer’s history of turnover and benefit claims. Factors such as whether the employer is new or has a positive or negative experience rating can significantly influence the outcome.
“In order to manage the company’s experience rating, employers should minimize employee turnover,” Fader said. He also advised employers “defend any unjustified UI claim” to avoid unnecessary benefit charges that count against an employer’s UI tax rate.
Caution with UI tax strategies
However, Fader cautioned employers about some tax strategies to lower UI tax bills. He explained that historically, companies might have tried to reduce their overall UI tax liability by transferring employees who were about to be laid off to a new legal entity, thereby maintaining a lower unemployment tax rate for the remaining employees.
“But, in 2004, President Bush signed the SUTA Dumping Prevention Act,” Fader started. “This federal law requires states to provide meaningful civil and criminal penalties when a person knowingly violates (or attempts to violate) laws that prohibit avoiding higher unemployment tax rates.”
Utilize voluntary contributions where applicable
Instead, Fader advised employers to consider “voluntary contributions” in states that offer this option to offset benefit charges, potentially lowering their UI tax rate and resulting in overall cost savings.
He explained that if an employee is laid off, the company may face a higher UI tax rate due to benefit charges. However, making voluntary contributions can offset these charges and potentially reduce the overall UI tax rate, resulting in cost savings.
“About half the states offer a voluntary contribution program, and participating in such a program may provide greater overall UI tax savings,” Fader said.
Other risks and higher industry rates
He emphasized that while layoffs generally lead to higher UI tax rates, employers should also manage other risks. Fader highlighted the importance of complying with the Worker Adjustment and Retraining Notification (WARN) Act and providing employees with timely advanced written notice of layoffs, as required by law.
Some industries are subject to higher UI tax rates, depending on the state’s laws. “Businesses with high turnover, including retail, construction, and hotels and restaurants, tend to have higher UI tax rates,” Fader said. Some states charge a new employer in the construction industry more than other employers, for example.
Compliance and worker classification
Compliance with state unemployment insurance (UI) tax laws is also crucial when it comes to worker classification. Fader said that state UI laws tend to define “employment” broadly and can include workers who are properly classified as independent contractors for other state laws, such as for income tax purposes.
“Some state UI laws provide an exemption for students, relatives, and part-time workers for a non-profit,” he added.
Importance of appeals
Employers can effectively contest or appeal unjustified UI claims by promptly challenging them and providing proper documentation and evidence. To avoid a higher UI tax rate, it is incumbent on the employer to timely contest such UI claims and have the proper documentation and evidence to win,” Fader said.
He noted that employers should document any on-the-job misconduct, communicate expectations to employees, and have employees sign documents acknowledging these expectations and consequences. Additionally, maintaining an employee manual outlining company policies can help in successfully contesting erroneous UI claims.
Keeping records
When it comes to proper record keeping for UI purposes, Fader advised employers accurately classify workers as employees or independent contractors and maintain proper documentation, such as independent contractor agreements. For employees not meeting expectations or exhibiting misconduct, he suggested employers document performance issues and meetings.
“If there’s a tax audit – whether for UI or income tax withholding – the company should do its best to identify issues before sharing any facts with the auditor,” Fader urged. He added that seeking a professional to help with the audit may be prudent, “even if the professional is behind the scenes.”
Report recommendations
The report suggests that states looking to improve their competitiveness should consider simplifying their UI tax systems, maintaining reasonable wage bases, and ensuring the long-term solvency of their UI trust funds.
